Yes, we believe that you can remove the co-borrower from the loan in this situation without modifying or refinancing the loan, provided there are no provisions in the loan agreement that might raise other issues.

The CFPB addressed a similar question regarding the addition to a loan of a borrower’s successor-in-interest, such as a surviving spouse or divorced spouse. The CFPB’s interpretation of Regulation Z is that adding a successor-in-interest who already has acquired an interest in the property securing the loan does not require the lender to perform a new ability-to-repay analysis for the loan. Following the CFPB’s reasoning, we believe that removing the deceased co-borrower from the note would not trigger a requirement for your bank to perform an ability-to-repay analysis on the remaining co-borrowers, nor do we believe that your bank would be required to redisclose the loan terms, as you would for a refinancing transaction.

We would add that, aside from the regulatory issues, the question of whether it would be prudent to remove the deceased co-signer without requiring the surviving co-borrowers to refinance the loan is a business decision that should be made by your bank based on safety and soundness considerations.

For resources related to our guidance, please see:

• CFPB Final Rule, Application of Regulation Z’s Ability-To-Repay Rule to Certain Situations Involving Successors-in-Interest, 79 FR 41631, 41633 (July 17, 2014) (“A residential mortgage transaction does not arise where a successor takes on the debt obligation that is secured by property the successor previously acquired. . . . Although these transactions are commonly referred to as assumptions, they are not assumptions under § 1026.20(b) because the transaction is not a residential mortgage transaction as to the successor. Accordingly, the [Ability-to-Repay] Rule in § 1026.43 does not apply to a transaction in which a successor seeks to take on the debt secured by property that the successor previously acquired.”)